Investment Week in Review - 18 April 2017

Pitcher Partners' wrap up of issues impacting the markets over the last week.

News in Review

US

In an interview published by WSJ, President Trump indicated a softer position on a number of matters of interest to the market. The President said the US dollar was getting "too strong" (which he attributed to the confidence generated by his presidency), claimed that he does “not like a low interest rate policy" and that he has an open mind as to whether to renominate Janet Yellen for another term as Fed Chair.

Retail sales in the U.S. fell for the second consecutive month in March, which combined with a drop in consumer prices for the first time in over a year, suggests that the U.S. economy has lost some momentum through the first quarter of 2017. The decline was mainly attributed to weakness in the automobile sector.

Australia

Australia's unemployment rate remained steady at 5.9% in March, boosted by the creation of 60,900 jobs. Pleasingly, full-time jobs rose by 74,500 while part-time jobs fell by 13,600. The rise in full-time jobs was the largest back-to-back gain in 29 years and reflects the pickup in economic conditions over the past 6 months.

The Westpac-MI consumer confidence index fell 0.9% to 99.0 in April. While households’ assessment of current conditions rose, views regarding the economic outlook however were noticeably weaker. Furthermore, Australia’s NAB business survey recorded the strongest business conditions since the GFC, with the index rising 5 points to +14. An improved assessment of trading conditions was largely behind the increase whilst the employment index steady at +5.

Europe & the UK

Economic sentiment in Europe’s largest economy, Germany, strengthened to a 20-month high in April following robust growth figures from industrial production, the construction sector and retail sales from February.

China

While China's steel industry has been a major driver of the world's second-largest economy in recent quarters, investors now fear that steel production may be significantly outweighing demand. This has led to producer price inflation cooling for the first time in seven months as iron ore and coal prices continue to tumble while steel inventory stockpiles rise to record levels.

GDP in the world’s second largest economy grew 6.9% YoY in Q1 of 2017, slightly ahead of market expectations for growth to remain stable at the 6.8% rate experienced in the fourth quarter of 2016. The rise in GDP was largely driven by the government infrastructure spending spree and a buoyant housing market that is showing signs of overheating.

Comment

Global markets remained in 'risk off' mode over the past week as geopolitical concerns in Syria and the Korean peninsula dominate news headlines, while the lead-up to the all-important French election and news of a bomb being dropped by the U.S. in eastern Afghanistan simmered in the background. The 'risk off' tone was particularly evident in strength in US treasuries (where 10-year yields fell 10 basis points to 2.23%), in credit markets where spreads across the key indices widened and in precious metals with the gold price approaching the $1,300 mark.

It is evident that investor’s appetite for risk is mainly being tested by increasingly aggressive behaviour shown by U.S. President Donald Trump and North Korean President Kim Jong-Un, with each volatile leader goading the other with incendiary statements and antagonistic displays of military might (including a failed missile launch by North Korea). With not much Australian economic data due over the next few days, geopolitical tensions are likely to be the main driver of the ASX200 in this shortened week.

The Week Ahead

US: Leading Indicators (MAR)

Australia: RBA April Rate Meeting Minutes

Europe: Markit Eurozone Composite PMI (APR)

UK: BOE's Carney Speaks at IIF in Washington

China: Retail Sales (YoY) (MAR)

Company News

Amaysim Australia Limited entered into a binding agreement to acquire 100% of Click Energy Group Holdings Pty Ltd (“Click”), an online pure-play energy retailer in Australia, on a cash-free and debt-free basis for a total consideration of $120 million, subject to purchase price adjustments at completion.

Telstra shares plunged to their lowest level in nearly five years after rival, TPG Telecom, announced it would spend around $1.9 billion on building a new 4G mobile phone network after winning a government tender. Vocus Group shares plunged more than 20% over the last week while shares of TPG are also down almost 18% as the increase in competition is expected to impact margins across the industry.

Major shareholders in BHP Billiton have urged the company to demerge its US oil assets to allow for operational improvements like South32, which has outperformed BHP since its demerger almost two years ago.

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